audit risk

To be recognized, revenues must be

Revenue is realized or realizable and earned when ALL of the following are met:

1. Persuasive evidence of an arrangement exists
2. Delivery has occurred or services have been rendered
3. The seller's price to the buyer is fixed or determinable
4. Collectibility is reasonably assured

In a small business where the benefits do not outweigh the costs of complete separation of duties, in order to obtain reasonable assurance that financial controls are intact

These control activities should be in place to prevent and detect errors:

no sales order should be entered without a customer order; a credit-check code or manual signature should be recorded for authorization; access to inventory and the shipping area should be restricted to authorized persons; access to billing terminals and blank invoice forms should be restricted to authorized personnel; accountants should be instructed to record sales and accounts receivable when all the supporting documentation of shipment is in order; care should be taken to record sales and receivables as of the date the goods and services were shipped and the cash receipts on the date the payments were received; customer invoices should be compared with bills of lading and customer orders to determine that the customer is sent the goods ordered at the proper location for the proper prices and that the quantity being billed is the same as the quantity shipped; pending order files should be reviewed frequently to avoid failure to bill and record shipments; procedures should be in place to ensure errors noted by these steps are properly corrected (error control log monitored by the information systems supervisor)

A revenue and collection walkthrough involves

following a sale from the initial customer order through credit approval, billing, and delivery of goods, to the entry in the sales journal and subsidiary accounts receivable records, then its subsequent collection and cash deposit

Completeness- all receivables that should have been recorded are recorded. substantive procedure?

Valuation or allocation- receivables are included in the financial statements at appropriate amounts and any resulting valuation adjustments are properly recorded. substantive procedure?

Obtain an aged trial balance of individual customer accounts and test the aging. Compare current year write-off experience to the prior-year allowance for bad debts. Examine cash receipts after the balance sheet date for collections on past due accounts. For large past due accounts, obtain financial statements or credit reports and discuss with the credit manager. Calculate an allowance estimate using prior relations of write-offs and sales taking under consideration current economic events.

The use of confirmations for accounts receivable is considered a required audit procedure by

If auditors choose not to use confirmations for accounts receivable they should document justification for the decision, which may include

1. receivables are not material
2. confirmations would be ineffective based on prior years' experience or knowledge that responses could be unreliable
3. analytical procedures and other substantive procedures provide sufficient, competent evidence

blank confirmation

negative confirmation

asks for a response only if something is wrong with the balance; used when risk of material misstatement is considered low, when a large number of small balances is involved, and when the client's customers can be expected to consider the confirmations properly

When confirmation is performed at an interim date, the following additional procedures should be considered:

1.obtain a summary of receivables transactions from the interim date to the year-end date and review them for unusual items
2. vouch a selected sample of transactions for the period
3. obtain a year-end trial balance of receivables, compare it to the interim trial balance, and obtain evidence and explanations for large variations
4. consider the necessity for additional confirmations as of the balance sheet date if balances have significantly increased

The audit team must review accounts for collectibility and determine the adequacy of the allowance for doubtful accounts in support of the _______ assertion.

To review accounts for collectibility, auditors review

sales cutoff period procedures

tracing shipping documents before and after year-end to the sales journal to ensure the sale was recorded in the proper period; credit memos for returns after year-end are vouched to receiving reports; any goods returned after year-end that were sold during the year being audited should be deducted from sales

Cutoff errors cause ____, ___ and ___ to be overstated and _____ to be understated.

substantive procedures

audit procedures to gather evidence on the assertions in account balances; to obtain direct evidence about the dollar amounts in account balances; goal is to detect evidence of any material misstatement due to errors or fraud